Minerals, Metals, and Megawatts: How China’s Power Generation Drives Its Industrial Metals Ecosystem

Executive summary

China’s dominance of electric vehicle and battery manufacturing, along with surging exports of these technologies, are some of the most surprising and well-publicized global economic trends of the 2020s. But the broader consequences of China’s electrification of both power generation and transportation remain underappreciated by global investors and policymakers. These trends have resulted from Beijing’s expansion of cheap electricity, the agglomeration of upstream materials production, and policies that enabled China to develop a dominant position in green technologies, while maintaining its competitive advantage in manufacturing of almost anything with an electric current: In other words, its emergence as an “electro-state.”

China’s focus on self-reliance in industrial development and the investment-driven incentives of local governments have produced pro-cyclical network effects: Power-intensive industries can thrive and become more efficient, while investments in upstream and downstream industries also accelerate. Nowhere is this more apparent than in metals refining, synthesis, and fabrication, which are low-margin, energy- and capital-intensive businesses.

Some of these developments have been unintended, others have been enabled by Beijing’s policy choices. Local government incentives to invest heavily and a financial system granting cheap credit to state-owned enterprises allowed Chinese energy-intensive industries to develop much faster than the growth of domestic downstream demand. With profits limited in China’s domestic markets, excess production is exported.

Policy choices incentivized fully localized industrial clusters regardless of the costs of maintaining them, and central planners then prioritized the expansion of power supply and grid development to facilitate these investments. The self-reinforcing results have created significant barriers to developing alternative supply chains outside of China for several industrial materials and manufacturing processes. The de-risking path for developed economies in critical materials and related technologies is now steeper and longer than anticipated.

This raises new questions for countries prioritizing the development of manufacturing supply chains outside of China. Demand-side policies, including tariffs and other trade barriers, will be necessary to insulate ex-China markets from competition and incentivize new investment. But minimizing reliance upon Chinese inputs will result in higher costs for manufactured goods, creating a collective action problem.

As a result, companies and governments outside of China are faced with more difficult choices of where to benefit from accessing specialized materials, where to compete with Beijing in developing alternative supplies, where to capitalize upon inputs from China, and where to negotiate access to materials with production that remains concentrated in China. Increasingly, those decisions will be based upon tradeoffs between the perceived security benefits of diversification and the availability of power resources to build alternatives. Every country will determine their own cost-benefit calculations based on different perceptions of security risks. This dynamic makes it far more difficult to obtain multilateral agreement in investing in alternative supply chains.

In aggregate, the pro-cyclical network effects that produced China’s electro-state structure uniquely combine metals processing, power resources, and production of advanced manufactured goods in a way that will be almost impossible to fully replicate in any individual market outside of China. This note details how this process unfolded and the implications for companies, financial markets, and global policymakers.

The emergence of an “electro-state”

Much of China’s focus on electrification has been driven by a desire to avoid dependence upon overseas markets for energy, a long-term objective that appears prescient based on recent events in the Persian Gulf. While many Western economies pursued decarbonization by constraining thermal power, China expanded thermal energy to meet the demands of upstream metals processing, intermediate materials synthesis, and manufacturing ecosystems required to produce competitively priced renewable energy products at scale. As a result, renewable energy technologies became cost-competitive in China long before these manufacturing industries reached these thresholds in the rest of the world.

Renewable power and electrified transport are central elements of electrification, which is measured as the percentage of final energy consumption sourced from electricity. The electrification metric attempts to capture the transition from fossil-fuel dependent technologies to electrically powered ones.

In 2025, China’s solar and wind power generation was larger than total industrial power consumption in the United States. In 2026, China’s combined wind and solar power generation will exceed US household and industrial power consumption combined. In transport, Rhodium Group estimates that China’s electric vehicle (EV) fleet is now consuming the equivalent of 1.76 million barrels of crude oil per day, up from 1 million barrels a year ago, reducing China’s future needs for imported oil.

The country’s renewables sector now provides scalable alternatives to combustion-based energy systems that have dominated global power generation and transport for roughly 150 years. EVs are now displacing demand for internal combustion engine (ICE) vehicles. Renewable power supplements and substitutes for power generated by fossil fuels. End-to-end electrified power and transport systems can now be exported from China to countries looking to reduce fossil fuel import dependencies. As a result, China is now the dominant force behind global electrification, producing almost all the components necessary for a global transition to renewable energy. But fossil fuels will also continue to play a critical role in China’s energy mix even as the country electrifies its economy faster than the rest of the world.

The power system

China’s thermal-dominated power system is designed primarily to serve industrial demand, especially the energy-intensive processing of metals and materials that anchor the country’s manufacturing base. While households, and increasingly services (tertiary sector) industries, are important factors in China’s energy consumption growth, roughly two-thirds of power consumption is still for industrial enterprises.

Within secondary industries, metals and materials production is easily the largest component of energy demand, reflecting the energy intensity of early-stage processing. Metals processing requires large volumes of cheap and reliable power.

According to the China Electricity Council, China’s manufacturing sector consumed 4,709 TWh of power in 2023. Of that, over 35% went into the production of metals and materials.  Within metals and materials, approximately 40% is used to produce aluminum, a material ubiquitous with electrification, manufacturing, infrastructure, and construction.

To accommodate all this industrial electricity demand, China built the world’s largest fleet of coal-fired power plants. Cheap, abundant thermal power became the backbone of the entire industrial ecosystem. Unlike crude oil and natural gas, which China imports heavily, coal is primarily a natural endowment. China’s thermal power network maintains a domesticated cost structure from the mine to the power plant. Coal extraction, transport, and combustion is primarily managed within China’s borders, which allows the national and local governments to subsidize costs at multiple stages in energy generation.

China’s state-owned enterprises (SOEs) can internalize and optimize costs across the value chain. If it is cheaper to generate electricity closer to mines and transmit it over long-distance transmission lines, rather than haul coal to production hubs, then power solutions can be adjusted to reduce costs. Firms can coordinate with local SOEs to shift costs to increase the competitiveness of downstream enterprises. Energy subsidies and freely available credit have reduced borrowing costs and supported rapid expansions of capacity and short-term investment growth. The thermal power system enabled abundant, reliable, and competitively priced power necessary for China’s continuous expansion of intermediate materials production.

Not all of this works seamlessly of course. Different incentives and targets for local officials can create significant disruptions in China’s energy system. In 2021, energy consumption targets at the local level coinciding with the Communist Party’s 100th anniversary caused widespread reductions in coal output, and sudden power shortages that significantly impacted industrial production for a few months. But on balance, Chinese authorities have created a system that has scaled up power output and improved its availability to an expanding set of industries.

In the global context, since 2000, the IEA estimates that China accounted for 60% of global power consumption growth. Over 60% of China’s power generation growth since 2000 has come from thermal power, meaning that over half the world’s additional thermal power generation since 2000 has come from China. More recently, according to Ember, over 50% of global power consumption growth last year came from China.

Despite China’s economic slowdown since the collapse of the property sector, power consumption in the country is still outpacing the rest of the world combined. These trends leave China as an outlier because power generation growth generally slows along with GDP growth. However, China maintains an investment and export-led economy driven by lower-cost state-directed credit. As a result, industrial expansion can continue even as profitability declines, which has also contributed to growth in electricity consumption.

During each surge in China’s industrial capacity, almost all the growth in power generation came from thermal sources—overwhelmingly coal fired power—with hydroelectric power as an important supplement.

By 2024, renewables started to play a larger role in China’s energy mix. Over the past year, almost all of China’s incremental electricity generation came from carbon-free sources, with wind and solar accounting for the bulk of the increase. Thermal power still dominates the base of the system, but the direction of change has flipped: Renewables are now driving the marginal growth in supply.

The power system’s pivot has resulted from an aggressive expansion in capacity for renewable energy. Carbon-free capacity is now far larger than thermal power capacity, and over the coming years it will likely begin to displace existing thermal power generation. The generation of “firm” electricity from thermal, nuclear, and hydroelectric sources remains distinct from intermittent sources of power such as solar and wind. Capacity comparisons here are not apples-to-apples in terms of actual power generation. For most heavy industries, intermittent renewable power is unsuitable, as outages introduce material risks to equipment and operations. As a result, coal will remain a central part of China’s energy generation in the years ahead, while renewables along with battery storage will play an increasingly important role in future growth.

The grid

The integration of intermittent renewable power requires expanding electrical grids to more effectively incorporate cheap renewable power and distribute it. Often the most conducive and predictable environmental conditions for renewable power generation are not located next to large urban industrial and commercial centers, but rather in deserts or on top of mountains. Effective renewable power integration requires more robust and flexible electrical grids that extend to regions with more conducive renewable resource endowments and predictable weather patterns.

Long distance, large-scale transmission projects had already been under construction in China for over ten years. Chinese utilities and grid operators already lead the world in next-generation transmission systems. China’s manufacturers construct almost all the world’s ultra-high voltage transmission lines used to move large amounts of energy over long distances. China’s previous buildouts of transmission infrastructure moved power from China’s western resource-rich regions to eastern industrial hubs. These transmission systems were previously built to move hydroelectric and thermal power but are now being built to move wind and solar energy. In a similar way, China’s northwest and southwest regions maintain more predictable weather patterns that reduce the intermittency of renewable generation.

Additional power demand is now primarily being met by rising renewable energy generation, yet China also added 88 GW of coal capacity in the past year alone. The sheer scale of China’s industrial growth still requires “firm” power, even as the country reduces its overall reliance on coal. But as China reduces its reliance on thermal power through expansions in renewables, grid investments have increased. Moving cheap, predictable, renewable power over long distances required a rapid expansion in grid investment.

China also leads the world in localized power distribution for electric mobility. In just the last year, China has added 6.6 million private charging piles, and 1.1 million for public use. Increasingly, these charging piles are demanding greater draw from grids for high-voltage charging and battery swap stations, which both reduce charging times. While battery swap stations were first used for passenger cars, the same technology is now being used for electric trucks.

Incremental innovation has been an integral part of China’s electrification. Electrified trucking was made attractive by reconfiguring battery swap stations initially designed for personal vehicles. High-cost, nickel-based cathode material was replaced with lower-cost, abundant, lithium iron phosphate (LFP) cathode material, which reduced battery prices, while increasing battery longevity. Along with the reconfiguration of swap stations, the battery cathode material changes accelerated global electrification of transport while expanding opportunities in utility-scale grid storage.

By the end of 2025, all electric heavy-duty trucks accounted for 20% of sales in China, a prospect unfathomable five years ago. It was China’s incremental innovation in battery technology development and changes in the costs of materials that made these advances possible. China’s trucks, along with the rest of the EV fleet, are already impacting Chinese oil demand (July 2025, Electric Trucks and the Future of Chinese Oil Demand).

But there was another critical foundation of China’s battery technology development as well. These rapid transitions from nickel-based cathode to LFP were only possible because China’s upstream mineral processing ecosystem can quickly expand to meet demand from a rapidly changing downstream market.

Minerals processing: The critical foundation

There are broadly four major stages in metals supply chains: mining, purification, synthesis or fabrication, and manufacturing assembly. Downstream, China’s industrial ecosystem has agglomerated capacity across nearly all mineral refining, processing, and manufacturing stages. This has been made possible through the mutual reinforcement of China’s power system and its industrial ecosystem: Abundant energy enables metals processing, while metals processing is the foundation of the hardware manufacturing for renewable power, and other electrified products. The country’s metals ecosystem is not merely an industrial strength, it has become the strategic foundation of China’s geopolitical leverage as well. This is a recent development, as these concentrations of minerals processing capacity in China have deepened in just the last five years.

There are four major factors that have enabled China to agglomerate a disproportionate capacity in mineral processing: natural endowments, processing scale, access to cheap credit, and downstream materials demand from manufacturers. Natural endowments provide feedstock certainty, existing processing scale enables further expansion, cheap credit finances that expansion regardless of potential profitability, and downstream manufacturing demand anchors the entire system.

China is now the largest producer of 19 of the 20 most critical metals for global electrification. The twentieth metal, nickel, is concentrated in Indonesia but the country’s processing capacity was largely built by Chinese engineers, owned by Chinese firms, and relies upon Chinese technology.

The country’s dominant position in metals supply chains is not only in electrified metals and rare earths but also in other minor metals like scandium, tungsten, and antimony which are integral to advanced technologies in aerospace and semiconductor supply chains. While a part of China’s dominant position in supply chains comes from natural endowments, the network effects associated with the greater processing ecosystem and demands of downstream manufacturing also play a key role. China is the largest refiner of major metals, producing about half of the world’s steel and aluminum, and is a large refiner of major metals such as tin, zinc, and lead.

Mining

Electrification is impossible without mining: Electrical infrastructure is built using conductive metals themselves. Developing a mine takes years, if not decades, but can remain in operation for more than a century. Mines require large upfront capital expenditures, and are dangerous for the people who operate them and for the surrounding environment. These economic and political considerations have limited the development of new mining operations in developed countries for decades. Output growth was left for less regulated political environments as a form of environmental and regulatory arbitrage.

An array of factors linked to the structure of China’s economic system enhance the country’s competitive advantages in mining, but many of them were reinforced by many developed countries’ lack of substantial investment and engagement in upstream supply chains, especially in frontier markets. While some of China’s advantages are linked to non-market forces, like below-market financing, others are linked to China’s natural endowments, downstream manufacturing, and openness to investing in frontier markets.

Natural endowments: A smelter cannot process materials it cannot access. China’s metals endowments and willingness to exploit them are a key determinant of its position as the world’s largest producer of an array of minor metals. China hosts the largest deposits of scandium, graphite, manganese, rare earths, antimony, and tungsten.

International investment: Securing critical mineral supply chains for end-product manufacturers is a key characteristic of China’s outbound investments in natural resources. Chinese state-owned mining companies invested overseas to secure necessary materials for downstream products. Early iterations of lithium batteries required cobalt, which turned into a driving factor for investment in the Democratic Republic of Congo (DRC). Of the 19 mines that produce cobalt in the DRC, 15 are owned, or partially owned, by Chinese entities.

Environmental controls: In worst-case scenarios, mineral extraction involves managing radioactive and toxic pollutants that, if improperly managed, cause long-term damage to the surrounding environment and the health of local populations. Metals extraction requires large volumes of water, electricity, and fuel. This requires a political commitment to these industries despite the environmental costs involved.

Laws, leases, and permits: China’s one-party state removes certain legal and permitting barriers that have emerged in Western democracies. Local governments in China typically support extractive industries by reducing the regulatory costs associated with starting and expanding mining activities relative to other jurisdictions.

Infrastructure: Deposits are often found in locations that are difficult to access, like mountain ranges. Moving fuel, power, and equipment to mining sites and mined material back is a large component of operating costs. Cheap credit and elevated risk tolerance from Chinese banks makes the construction of that infrastructure possible.  The Simandou mines in Guinea are an example of new Chinese roads, rails, and ports enabling access to large deposits.

Specialized labor and human capital: Chinese labor costs have risen substantially but remain below developed country wages. Low-wage, high-talent labor pools suppress operating costs in China and for Chinese firms operating in third markets.

Financial support: Chinese banks provide mining companies with preferential interest rates for acquisitions, expansions, and infrastructure. Below-market financing supports Chinese firms’ bids for projects relative to mining companies outside of China competing for access to the same deposits.

Offtake agreements: Projects are derisked through downstream commitments from both intermediate processors and downstream manufacturing. Because China maintains the largest ecosystem of end-users in the manufacturing sector, there are also large numbers of potential buyers willing to commit to long-term purchase agreements.

Processing

Barriers to entry in the metals processing space are arguably higher than in mining. This stage is where production complexity and costs become important barriers to entry. China dominates this “unlocking” stage of the global metals supply chain, turning raw materials into industrial inputs for emerging and advanced technologies. There are several factors that contribute to this concentration of Chinese capacity.

Resource intensity and chemical complexity: Minerals refining is an energy- and resource-intensive process. While each mineral requires specific processing techniques, almost all require large volumes of electric power. Some refining processes rely on corrosive and toxic chemicals to separate metals while others create hazardous waste streams. The Chinese government’s willingness to address these challenges and bear these costs supports the expansion of heavy industry.

Operating requirements: Smelters must maintain steady feedstock volumes, and refineries must meet downstream quality specifications. Both smelters and refineries must run continuously because shutdowns damage equipment and restarts are capital-intensive. As a result, smelters and refineries operate 24/7, often producing at costs below market-clearing prices. For a low-margin industry, this creates difficult operating decisions. The differentiating factor in China is downstream demand for companion and byproduct metals that require reliable customer bases to continuously produce. Non-market-based support from local banks and governments reduce project development risks and support operations under these challenging operating conditions.

Scale-driven logistical burdens: Early-stage processing requires moving massive quantities of material. Ore grades for many metals are below 1% of the extracted material, meaning that producing 1,000 tons of refined material requires extracting more than 100,000 tons of rock. Concentrators reduce waste rock on site, but large quantities of waste material must be transported to smelters for processing. As the world’s largest trading nation and bulk importer, Chinese firms can competitively manage costs associated with transporting large volumes of material.

Pricing power through processing premiums: A mining company’s revenue is often primarily determined by the selling price of the refined metals minus the treatment and refining charges paid to processors. The premium that China’s manufacturers are willing to pay draws raw materials into China’s processing ecosystem, while the VAT costs can also disincentivize or restrict market access for foreign firms. When Chinese refineries offer mining companies the most favorable pricing, and the supply of raw material to process is constrained, competitors elsewhere are forced with the unpleasant choice between locking in losses while operating at a reduced capacity or shutting down entirely.

Tolerance for operating losses: Chinese firms’ willingness to smelt and refine metals at a loss for prolonged periods pushes higher-cost competitors out of the market. Maintaining operations during unfavorable price cycles entrenches China’s share of global processing capacity, making foreign exits more permanent. While these competitive bids for materials that imply operating losses at smelters are not sustainable over the long run, they reinforce China’s dominant position at the expense of foreign competitors. The tolerance toward losses is directly linked to the banking system’s financing of projects, often based on non-commercial terms or Beijing’s industrial policy objectives.

Beyond logistical challenges, three elements bolster China’s metals processing moat: expertise, power, and integration. By developing the world’s largest metals processing workforce, China has the capacity to reconfigure existing capacities or to develop new or more efficient processes faster. China adds thermal power faster than anywhere in the world for its industrial enterprises. And downstream, Chinese manufacturers are the largest consumers of metals which offers processors the largest set of potential downstream buyers.

Minor metals: Hosts and companions

Ore bodies almost always host multiple metals, but the economic viability of extracting non-primary metals varies. China’s vast refining network allows its metals-processing ecosystem to capture value from both co-located metals in ore bodies and the byproducts generated during host-metal production.

These companion and by-product metals require specialized refining capacity to recover, which can be costly. China’s integrated processing ecosystem is uniquely equipped to extract and refine many of these materials at scale, allowing producers to capture value that would otherwise be lost.

There are several well-known examples of critical minerals that originate as byproducts of major host-metal supply chains. A large share of the world’s cobalt supply comes from copper–cobalt ore bodies in the DRC. Gallium is recovered during alumina refining. Gold and silver are commonly recovered as byproducts of copper processing. While some of these metals can be mined from dedicated deposits, if they are not captured during host-metal processing, they typically end up in tailings, slags, or other waste streams.

Many companion and byproduct metals are traditionally considered too costly to extract, and as a result they often accumulate in waste piles outside processing facilities. Installing the additional capacities required to recover metals such as gallium, germanium, indium, or tellurium involve significant capital expenditures that are difficult to justify given the relatively small market size and historically low prices of these materials. In most markets, this makes recovery and processing uneconomic.

China’s downstream manufacturing ecosystem fundamentally changes this calculus. Because Chinese mobile phone, battery, semiconductor, LED, and other manufacturers require stable supplies of minor metals, refiners can enter into offtake agreements that guarantee downstream demand from the domestic manufacturing ecosystem. This reduces commercial risk and allows smelters and refineries to justify capital expenditures for byproduct recovery in ways that are not feasible elsewhere.

For minor metals, especially companion and byproduct metals, the offtake agreements are essential to start production. Major metals benefit from the ability to sell refined output to exchanges. Minor metals maintain a smaller set of potential customers because materials are produced for specialized purposes. Because minor-metal refineries depend on continuous operation, producing output without assured demand represents a material commercial risk that most firms are unwilling to assume.

The symbiotic relationship between refiners and manufacturers within the Chinese industrial ecosystem reduces uncertainty in upstream supply chains while also empowering incremental innovation in downstream manufacturing. The outcome is a supply chain that combines upstream metals processors with downstream metals consumers that simply does not exist anywhere else in the world.

The materials demanded by China’s extensive manufacturing base and the array of offtake guarantees these manufacturers create are highly significant. Over four decades, China’s midstream processors expanded capacity to meet the demands of more complex device manufacturing downstream. That growing downstream demand improved midstream processing efficiencies as well.

China produces 200 million televisions and 1.5 billion smartphones per year. Producing the TV sets guarantees offtake of 25 to 30 metals, while the phones require close to 60 metals. Televisions require the same critical minerals for which many governments are trying to develop alternative suppliers, but there are far fewer potential buyers outside of defense-related supply chains because commercial demand for these minerals has become increasingly concentrated in China.

Electronics manufacturing expands the number of metals demanded from refineries, which in return justifies investments in companion mineral extraction capacities. Goods such as air conditioners and batteries increase the scale of major metals demand. And in metals processing, larger scale lowers costs.

Large volumes of metals consumed by prior iterations of appliances, combined with China’s production in microelectronics set up the Chinese market to succeed in the manufacturing of new era goods such as EVs, robots, and drones. While these are novel technologies, they are made of the same metals used in electronics, appliances, and toys.

By establishing the world’s largest manufacturing base, the ecosystem ensures the greatest volume and diversity of offtake for processed metals and minerals. The total volume of downstream manufacturing enhances midstream processing competition for upstream materials to fabricate or process on behalf of downstream buyers.

The relative size of China’s manufacturing ecosystem has pushed competitors such as GE Appliances, Philips Appliances, and even Sony to sell majority stakes in their appliance and television businesses to Chinese partners which localized an even great proportion of related activities in the Chinese manufacturing ecosystem. The movement toward greater localization in China is a loss to potential future commercial demand in an ex-China market.

The manufacturers and refineries operating in China’s ecosystem are at a comparative advantage also in part because of localized recycling, or upcycling activities. Localized refining reduces transport costs for large-volume scrap. The highest-quality scrap is generated at the earliest stages of the industrial supply chain, making it the most efficient source of supplementary feedstock for refineries. By co-locating each node of manufacturing supply chains in a single market, refineries benefit from a steady flow of low-cost throughput originating from the synthesis and fabrication stages of production. These throughputs are often less costly to process than mined materials which contain companion metals, such as thorium or uranium, that create challenges during the separation process.

China’s dominance in metals mining, processing, and manufacturing of low-margin electronics enhanced the Chinese economy’s advantage in producing EVs and batteries at scale: Growth in these downstream markets in turn justify further upstream expansions, and the supply chain nodes in between. The same process of vertical integration across the supply chain has helped Chinese EV manufacturers to reduce costs relative to their foreign competitors even inside China (See Feb 2026, “Why Are Chinese EVs So Cheap?”)  This positive feedback loop does not exist anywhere else in the world, and it is the material foundation of China’s rise as the world’s largest metals processing hub.

Other global nodes in metals supply chains

From the mine to finished product, the Chinese industrial ecosystem benefits from agglomeration effects. This dynamic creates challenges, and occasionally opportunities, for processors competing with, and often partnering with, Chinese enterprises. Expansions of individual supply chain nodes in China can suppress margins of foreign competitors. Because the country is such a large refiner of metals, processor of intermediate products, and manufacturer of final goods, developing strategies to compete with China can be costly.

Capacity expansions in China can suppress margins and reduce downstream product prices. Chinese supply chains struggling from a lack of domestic demand are just as likely to export final products as intermediate goods. Attempts to diversify away from China’s upstream chains will inevitably result in higher-cost inputs under current market structures. This is especially true in the new era of electrified goods, like batteries, which will consume millions of tons of refined metals that are primarily refined and synthesized in China.

Supporting downstream assembly without addressing upstream supply chains results in vulnerabilities from China’s controls over upstream materials production. A firm that must import hundreds of thousands of tons of refined metals will likely also rely on the same supply chain for recycling. Shipping hundreds of thousands—or even millions—of tons of materials to a downstream manufacturer, only to ship thousands of tons back as scrap and recycled end-of-life material is a costly logistical hurdle when attempting to compete for global market share of finished manufactured goods.

Despite the challenges Chinese supply chains create, miners, fabricators, smelters, refineries, manufacturers, financial institutions, trading houses, and governments outside of China continue to devise strategies that involve both competition and cooperation with the Chinese industrial ecosystem. Efforts to develop ex-China supply chains require international coordination and commitments that enable sustainable linkages within a protected ex-China market. Successful long-term strategies for sustainable ex-China supply chains must rely on competitive advantages, natural endowments, corporate commitments as well as strategic investments—protectionist measures alone will have little impact on China’s dominant position.

Different countries have played a range of roles in the efforts to develop alternatives to Chinese supply chains.

The Fixers: Japan and South Korea

These countries have few natural endowments of critical resources, but extensive processing and manufacturing capacities. While Japanese enterprises engage in upstream processing for ex-China production and supply chain security, South Korean enterprises expanded upstream refining and intermediate metals synthesis specifically for US supply chains in response to the Inflation Reduction Act (IRA) and the One Big, Beautiful Bill Act (OBBBA).

Japanese trading houses have a history of securing materials to process for their own industrial enterprises. The Japanese approach is market-oriented, facilitated by trading houses, but also involves government backing via investment firms. Alongside coordination with foreign companies, Japan has been the most successful in developing and sustaining an alternative rare earth supply chain. From the mine to the finished manufactured product, Japanese trading houses have successfully financed alternative supply chains that circumvent the Chinese ecosystem for an array of materials and intermediate manufactured goods.

South Korean firms were the most responsive to US incentives linked to the IRA. To receive IRA subsidies, a percentage of battery content needed to be produced in markets outside of China, and by firms with limited Chinese ownership. Over the past several years, South Korean firms constructed new supply chains to reduce Chinese content to meet IRA requirements. More recently, Korean Zinc announced a multibillion-dollar refining facility for major and minor metals in response to the OBBBA.

The Ambitious: Saudi Arabia and Indonesia

At LME week in October 2025, Saudi Arabia’s Vice Minister for Mining Affairs Khalid Al-Mudaifer said “policy allocates vision, markets allocate value.” For both Saudi Arabia and Indonesia, the approach to supply chain agglomeration is through global non-alignment, while using natural endowments.

The Indonesian government has been public about its aims to develop its own battery supply chain. The country’s natural endowments of both metals for batteries and coal for thermal power are competitive advantages in the development of both upstream mining, midstream processing, and downstream manufacturing necessary to be competitive.  These natural endowments, combined with a willingness to work with South Korean, Japanese, and Chinese firms, have led to investment in all components and stages of the battery supply chain.

The Saudi government established a government-funded mineral exploration program as part of a diversification strategy to move the country’s economy away from oil, while also pushing efforts to move up the value chain through integrating mining and refining. By relying on domestic deposits, the country can lean into its regulatory expertise in extractive industries to diversify its economic system away from fossil fuels for combustion engines and toward minerals for electrification.

The Specialists: Chile and Peru

Many countries with long histories of mining and refining materials maintain persistent advantages due to their natural endowments. Chile and Peru extract 23% and 14% of the world’s copper, respectively. Over time, China has demanded less refined copper and more copper concentrate to feed the country’s expanding fleet of smelters. China’s refining capacity expansion served as a headwind to the development of localized value-added in smelting, refining, and downstream manufacturing in Chile and Peru.

But sticking to mining and avoiding smelting and refining has proven a successful strategy for Chile and Peru. Chinese investment in mines, ports, and roads support greater levels of economic activity than operating smelters and refineries. China’s aggressive domestic expansion in midstream processing moved the supply chain bottleneck from midstream processing to the mine, and as a result, Peruvian and Chilean miners now have a much stronger negotiating position over the supply of concentrate and charges within refined copper contracts. For 2026, Chile’s state-owned mining company settled with Chinese buyers on the highest premium ever for refined copper, while buyers of concentrate are starting to pay Chilean miners to process their material.

The Sleeping Giants: Australia and Canada

These developed economies with vast landmasses host large volumes of untapped mineral resources. Australia and Canada have historically been two of the most important hosts of mines globally but have become increasingly dependent on Chinese demand for sales of raw materials, while suffering from declining refining margins.

Developed economies have historically relied upon market forces to determine economic activity, but the weaponization of supply chains and export controls has changed that calculus. A revival of midstream processing capacity now appears far more consistent with the security needs of developed economies.

However, any plans will need to sustainably address the higher costs associated with processing metals in developed economies relative to China to ensure their long-term viability: Expansion of processing in developing and frontier markets (Malaysia, for example) will likely be a more cost-effective way to expand and sustain alternative supply chains in critical materials. So far, developed country governments have struggled to address the real tradeoffs associated with developing mineral processing supply chains.

Early-Stage Competitors: The United States

Industrial policy efforts in the United States have already started several processes, but success in development of a competitive alternative ecosystem outside of China is far from assured. The Biden administration’s IRA provided downstream manufacturers of renewable energy equipment with financial support, and the Trump administration’s OBBBA allocated money to support upstream metals processing. In combination, these would lay the foundation for critical supply chains that could create the necessary downstream demand, talent pools of workers, and incentives for upstream processing necessary to compete in high-volume electrified product manufacturing over the long-term. However, the removal of IRA support and inconsistency in expected terms of trade are headwinds to building sustainable alternative supply chains.

Risks to China’s position

China’s industrial ecosystem did not develop under market-based conditions, nor has it resulted from a specific plan or longer-term strategic design. Subsidies for critical technologies and low-cost credit were critical to its development, along with longer-standing policy priorities to indigenize industrial development. But much of the expansion of capacity was uncoordinated and driven at the provincial level, by local officials who saw expanding power generation for materials production in virtually any heavy industry as a pathway to growth, regardless of China’s addressable market size. These dynamics led to uncoordinated capacity expansions across an array of industries, like solar, for example. Local government initiatives often resulted in redundant and antiquated capacity that depressed margins and prices, displaced international competitors, and imposed financial losses on both local banks and governments.

As China moved up the value chain, a growing array of global industries became exposed to supply shocks associated with Chinese demand cycles. Because of the outsized role of Chinese production, shifts in China’s domestic demand, such as the four-year decline in China’s property construction, now reverberate through global supply chains. The resulting slowdown and decline in profitability has impacted China’s tax revenue growth and the capacity of its financial system to maintain current patterns of investment, further weakening demand for specific metals, particularly steel.

When China’s domestic demand slows, Chinese producers sell more intermediate and final goods abroad. Businesses across the value chain operating primarily outside of China are now exposed to supply shocks from Chinese firms flooding global markets, and from demand shocks originating from weaknesses in China or global consumer demand.

The slowdown in global demand is now the larger threat to China’s industrial ecosystem, given its dependence upon continued export expansion. Sustaining the Chinese industrial ecosystem in the event of a global recession would be difficult. China’s fiscal system is ill-prepared to provide counter-cyclical support, as the consolidated fiscal deficit is already 9% of GDP. The banking system and the central bank will need to keep a highly indebted corporate sector operating despite weakening downstream demand and profitability.

The next decade and the quest for independence

The next decade of global growth will depend upon access to the physical materials of emerging technologies. The decade after the global financial crisis in developed economies was characterized by low capital expenditures, high returns, financialization, and the growth of digital platforms and services. By contrast, today’s emerging growth sectors are far more dependent on capital-intensive investments in energy, infrastructure, and industrial materials. These were also the drivers of China’s growth since the global financial crisis. Now, China’s competitive and geopolitical advantage is the integration of its industrial system’s position in processing, power generation, and manufacturing.

There is growing momentum in open, free-market democracies to redefine upstream and downstream supply chain nodes as national security priorities. Companies and governments must grapple with the possibility that China might withhold supplies of critical industrial inputs, just as Beijing has already threatened to limit rare earths and minor metals supplies.

Protecting developed economy markets from low-cost competition from Chinese producers behind tariff and non-tariff barriers is a precondition for building and maintaining specific alternative material supply chains. Coordinating those protections of demand in developed economies is a mighty challenge on its own, particularly after the Trump administration’s indiscriminate use of tariffs over the past two years. But the supply response will prove even more vexing for Western policymakers.

Industrial policy plans in the developed economies will soon be confronted by the principles of thermodynamics. There is no transportation of power without conductive metals, and these metals face rising supply constraints. Electrification is synonymous with a rapid expansion in demand for metals with high conductivity, like aluminum and copper. Building out a comparable energy system to China’s when commodity prices are already elevated would only embed higher energy costs into new industrial capacity, diminishing international competitiveness, especially relative to Chinese firms.

These higher costs make a reconsideration of the political and economic trade-offs in developing alternative industrial capacity vital. At this point, China’s manufacturing ecosystem is too integrated into upstream Western supply chains to be removed quickly or entirely. Western derisking efforts will be forced to refocus and prioritize specific interventions. Generating new sources of low-cost power on a massive scale, speeding up permitting timelines, and rapidly expanding a labor force trained in metals processing are all crucial, but can only be solved with time.

Some Chinese firms are already investing and operating in third markets, bringing critical technologies and know-how with them. From a US security perspective, it may not be as attractive when Chinese-owned firms circumvent trade barriers by identifying the path of least resistance to developed market access. Final-step assembly, or other later-stage processing, in third markets still enables Chinese firms to influence the upstream processing stages of manufacturing while continuing to access market demand in developed economies. But there are arguable security benefits to final goods manufacturing capacity moving outside of China, despite these firms’ dependence upon upstream components.  These are just some of the difficult trade-offs for policymakers to consider when prioritizing new investments.

The era of trade liberalization and globalization following China’s entry into the WTO established the global integration of manufacturing supply chains that are now viewed as security risks. Both governments and multinational companies have interests in identifying and reducing risks and neither side can expect that the other will foot the bill to do so. Many multinationals and governments have lessons to learn and institutions to build that broadly replicate the successes of Japanese and South Korean fixers who have long balanced the benefits of interdependencies and risks that arise from trading with China.

Western dependence on China’s upstream, midstream, and advanced materials will remain structural, not temporary. Relocating midstream processing requires both new flows of raw materials to process and guaranteed buyers of downstream production. Access to supplies of certain physical materials where production and processing is concentrated in China will become more frequent topics of negotiations with Beijing. Multilateral pressure on China to ensure supplies within those negotiations would be far more effective than bilateral side deals, alongside multilateral threats to restrict China’s access to Western markets. This is not the world that exists today, which is one reason that Beijing has been effective in using its leverage over critical mineral supply chains.

From the perspective of the US government, there are several sectors where China’s government may choose to inflict the highest economic costs at the lowest costs to its own economy. Reducing this leverage from Beijing will require nonmarket pathways to develop alternative supply chains. Rare earths are an extreme example of these chokepoints, but there are others as well. Beijing has many levers to pull, but all are costly to China’s economy to some extent.

The next phase of global industrial competition will be fought not only over innovation but over access to resources, inputs for power generation, processing efficiency, and the quality of specialized material production. China has already aligned these elements into a self-reinforcing ecosystem, but parts of that system rely heavily upon global demand to sustain it. Rebuilding parallel supply chains elsewhere requires sustained policy commitment, predictable and scaled sources of demand at multiple nodes of supply chains, and a willingness to tolerate higher costs of final products in exchange for reduced security risks over supplies.

Crucially, metals supply chains cannot be built quickly. Developing mines, scaling processing capacity, developing synthesis expertise, and integrating downstream manufacturing takes decades. Tempering expectations about the speed of a derisking response from China will be essential, as premature or poorly sequenced efforts risk wasting capital and squandering the credibility of Western policy efforts rather than building durable alternatives. The decisions made in this decade will determine whether a high level of diversification from China remains aspirational or becomes achievable in the next. The scale of the challenge originating from Beijing’s command over material supply chains is only starting to be recognized.